Reinsurance Market Outlook - Aon Benfield - Reinsurance

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REINSURANCE MARKET OUTLOOK Executive Summary – Remarkable Recovery The remarkable recovery of both insurer and reinsurer capital translated into a catastrophe reinsurance renewal market for January 2010 that was focused on rate decreases in all peak zones of the market. Rate on line (ROL) decreases were in line with Aon Benfield’s light catastrophe season scenarios published in September 2009. Rate decreases, adjusted for changes in exposure, for the peak zones of U.S. hurricane and U.S. earthquake ranged from minus 5 to minus 15 percent. At the mean, the ROL decreases taken on January 2010 renewals were very similar in magnitude to the rate increases taken on January 2009 business. Global reinsurer capacity is driven by capital. Capital increased by 16.6 percent through September 2009, likely fully recovering from the 16.9 percent capital decrease in 2008 by the end of 2009. As a result, capacity for the global catastrophe reinsurance market has been restored to near its all time December 2007 peak and it is meaningfully higher than witnessed throughout the January 2009 renewal season. Reinsurers showed markedly less anxiety than last year and were more focused on gaining the largest possible signings on their program authorizations rather than on rate. The market is again price competitive as capacity growth outpaced demand growth. Other major reinsurer catastrophe zone exposures such as European windstorm, flood and earthquake are reinsured for substantially lower ROLs at similar expected loss than United States peak zone exposures. They tend to reflect experience, exposure and model changes rather than being tied more clearly to changes in reinsurer capital. Layers impacted by European windstorm Klaus generally saw experience based ROL increases while unaffected layers generally held ROLs stable or were reduced by as much as 6 percent. The global catastrophe reinsurance market softened; however, the market is not soft. Renewal rates reflect a disciplined view by reinsurers on the balance of risk and return on capital deployed. Aon Benfield believes that reinsurers will not be able to deploy all their capital and, as a result, we project $10 to 15 billion in significant reinsurer share repurchases during the year. The growth of government-sponsored insurers and reinsurance-like entities continues to erode the opportunities for private reinsurers to deploy capacity. Reinsurers have the capacity or could maintain higher levels of capital if reasonable demand were present. Casualty and specialty insurers continue to benefit from an abundance of reinsurance capacity. Experiencebased rates drive most of the renewal pricing and continual decreases in loss frequency paired with reasonable increases in loss severity mean that insurance and reinsurance rates per unit of exposure continue to decrease. In some lines, such as directors and officers liability, there have been historical differences of opinion between insurers and reinsurers over original rate sufficiency. Reinsurers have substantially erred on the side of safety and priced or structured themselves out of a material segment of casualty business. Insurers have benefited greatly from the higher retentions taken in response to what have proven to be unreasonable reinsurer price and structure proposals over the years. The business that insurers retained has been very profitable for the underwriting years from 2003 to 2007. Reinsurers will need to rethink their value proposition to casualty and specialty insurers as those insurers face an even more competitive marketplace. 4
January 2010 Renewal Highlights AON BENFIELD The table below provides risk adjusted rate change information for key U.S. business segments renewing at January 2010. Additional commentary regarding these renewals as well as broader commentary on placements in other territories renewing reinsurance placements can be found later in the document. Figure 1: Risk Adjusted Rate Changes Business Segment Price Change Property Catastrophe Down 5% to 15% Property Per Risk Flat to down 5% General Casualty Flat Medical Professional Liability Flat Lawyers Professional Liability Flat Directors and Officers Liability Flat to down 5% to 10% Workers’ Compensation Flat to down 5% Source: Aon Benfield Analytics Health Flat Surety Flat to down 10% Multiline Flat to down 5% Global Factors Influencing Reinsurance Supply and Demand The figure below highlights the key impacts on supply and demand for the January 2010 renewal season. Figure 2: Global Factors Influencing Reinsurance Supply and Demand Global Factors Influencing Reinsurance Supply + Near peak reinsurer capital position + Reasonable profitability and returns on capital - Less redundant reserves - More conservative investment management strategies + Little uncertainty on capital requirements - Significant share repurchases = Reinsurer capital is likely to grow at a lower rate than observed in 2007 and 2009 5
Page 1 and 2: Reinsurance Market Outlook Remarkab
Page 3: Table of Contents Executive Summary
Page 7 and 8: Expectations for Upcoming Property
Page 9 and 10: Reinsurer Share Repurchase and Spec
Page 11 and 12: Catastrophe Bonds vs. Traditional R
Page 13 and 14: AON BENFIELD Figure 9: Top Personal
Page 15 and 16: Rating Agency Perspective AON BENFI
Page 17 and 18: AON BENFIELD Existing and new chall
Page 19 and 20: Figure 17: Historical 10-Year Treas
Page 21 and 22: Challenges of a defined and disclos
Page 23 and 24: AON BENFIELD Based on an Aon Benfie
Page 25 and 26: Florida Market Capacity Update AON
Page 27 and 28: AON BENFIELD Citizens’ net loss e
Page 29 and 30: AON BENFIELD Certain insurance ente
Page 31 and 32: January 2010 Renewal Highlights The
Page 33 and 34: AON BENFIELD For Motor and related
Page 35 and 36: AON BENFIELD France First layer pro
Page 37 and 38: AON BENFIELD UK and Ireland Prices
Page 39 and 40: AON BENFIELD Non-marine retrocessio
Page 41 and 42: AON BENFIELD Medical Professional L
Page 43 and 44: AON BENFIELD Workers’ Compensatio
Page 45 and 46: AON BENFIELD Commercial surety (acc
Page 47 and 48: AON BENFIELD South Africa Catastrop
Page 49 and 50: Liability Domestic Markets 2009 201
Page 51 and 52: About Aon Benfield As the industry

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